How higher Fed rates stand to affect Americans’ finances
WASHINGTON — Record-low mortgages below 3% are long gone. Credit card rates are likely to rise. The cost of an auto loan will also rise. The yield on auto loans may be high enough to keep up with inflation. Savers might finally get a higher yield.
The substantial half-point increase in the benchmark short-term interest rate announced Wednesday by the Federal Reserve won’t have an immediate impact on most Americans’ finances. But additional large hikes are expected to be announced at the Fed’s next two meetings, in June and July, and economists and investors foresee the fastest pace of rate increases since 1989.
The Fed’s fight against high inflation and the end of a decade-long period of historically low rates could result in higher borrowing costs for households.
Chair Jerome Powell believes that by making borrowing more costly, the Fed will be able to cool demand for homes, cars, and other goods and services, and slow down inflation.
But the risks are high. The Fed may have to raise borrowing costs to keep inflation at a high level than it currently anticipates. This could lead to the U.S. economy going into recession.
Here are some questions and answers about what the rate hikes could mean for consumers and businesses:
I’M CONSIDERING BUYING A HOUSE. WILL THE MORTGAGE RATE GO UP?
Home loan rates have risen in the past few months largely in anticipation of Fed moves and will likely continue to rise.
Mortgage rates don’t necessarily move up in tandem with the Fed’s rate increases. Sometimes they move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These factors include investors’ expectations of future inflation and the global demand for U.S. dollars. Treasurys.
For now, though, faster inflation and strong U.S. economic growth are sending the 10-year Treasury rate up sharply. As a consequence, mortgage rates have jumped 2 full percentage points just since the year began, to 5.1% on average for a 30-year fixed mortgage, according to Freddie Mac.
The jump in mortgage rates is partly due to expectations that the Fed would continue raising its key rate. However, the Fed’s upcoming hikes are not yet fully priced in. If the Fed jacks up its key rate to as high as 3.5% by mid-2023, as many economists expect, the 10-year Treasury yield will go much higher, too, and mortgages will become more expensive.
WILL THAT AFFECT THE HOUSING SALE MARKET? If you are looking to purchase a home but are frustrated by the shortage of houses available, which has led to bidding wars and high prices, it’s unlikely that this will change.
Economists say that higher mortgage rates will discourage some would-be purchasers. And average home prices, which have been soaring at about a 20% annual rate, could at least rise at a slower pace. Bankrate chief financial analyst Greg McBride stated that the rise in mortgage rates will “disrupt the pace of home price appreciation” as more potential homebuyers are priced out.
Despite this, the number of homes available remains historically low, which will frustrate buyers and keep prices high.
WHAT IS IT ALL ABOUT AUTO LOANS?
Auto loans can become more expensive due to rising Fed rates. These rates can be affected by other factors, such as competition from car manufacturers that can sometimes lower borrowing costs.
Rates for buyers with lower credit ratings will rise due to the Fed’s hikes. Alex Yurchenko is chief data officer at Black Book, which monitors U.S. car prices. Monthly payments will rise because used vehicle prices are on average rising.
At the moment, new-vehicle loan rates average 4.5%. The rates for used-vehicle loans are approximately 5%.
WHAT ABOUT OTHER RATES
Rates for users of credit cards, home equity loans, and variable-interest debt would rise roughly in line with the Fed’s hike, usually within one to two billing cycles. Because those rates are based partly on the prime rate of banks, which moves in tandem to the Fed, it is possible that they will rise.
Those who aren’t eligible for low-rate credit cards may have to pay higher interest on their balances. Their cards’ rates would rise in line with the prime rate.
If the Fed decides to raise rates by 2 percent or more over the next two year — a distinct possibility — it would significantly increase interest payments.
WILL IT BE EASIER TO EARN MORE FROM MY SAVINGS?
Probably, though not likely by very much. It all depends on where your savings are located, if any.
Savings, certificates of deposit and money market accounts don’t typically track the Fed’s changes. Banks tend to take advantage of a higher rate environment to increase their profits. Banks do this by increasing interest rates for borrowers while not offering better rates for savers.
This is especially true for large banks. They have been flooded by savings due to government financial aid and decreased spending by many wealthy Americans during the pandemic. They won’t have to increase savings rates to attract more CD buyers or deposits.
Online banks and other high-yield savings accounts might be an exception. These accounts are well-known for being aggressive competitors for depositors. They do require large deposits.
Savers are beginning to see better potential returns from Treasurys. On Tuesday, the yield on the 10-year note was 2. 96%, after having briefly topped 3% for the first time since 2018.
Financial markets expect inflation to average 2. 83% over 10 years. That level would give investors a positive, if very small, return of about 0.13%. All of a sudden we find ourselves in a position where fixed income can be more competitive than ever before,” stated Jason Pride, chief investment officer at Glenmede.
AP Auto Writer Tom Krisher in Detroit contributed to this report.
This story has been updated to correct the spelling of the Jason Pride’s firm. It’s Glenmede and not Glendmede.
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